OPINION

Zuma stands by figures on black-ownership of JSE - The Presidency

3% figure used by the President based upon NEF's measure which relies upon work done by Who Owns Whom

President Zuma stands by assertion that black ownership stands at three percent

01 March 2015

In the reply to the State of the Nation Address on 19 February 2015, President Jacob Zuma said black ownership of the Johannesburg Stock Exchange stood at three percent and incurred the wrath of some economic commentators.

Commentators referred to a JSE statement that the black ownership of the top 100 companies on the JSE had increased to 23 percent, about 10 percent through black economic empowerment schemes and about 13 percent through vehicles such as unit trusts and pension funds. 

The President stands by his assertion, which was based on the measure used by the National Empowerment Fund (NEF) to assess direct black ownership and control in the South African economy, using the Johannesburg Stock Exchange (JSE) as a proxy.

The NEF relies on the work done by Who Owns Whom (Pty) Ltd, an independent research organisation producing original research on the African business and economic environment. 

In determining the level of economic transformation in South Africa, JSE market capitalisation is a reliable proxy given the availability of information published by the JSE. In accordance with applicable legislation, unlisted share ownership is not disclosed in the public domain and therefore black control over private companies is excluded from determination of black-controlled shares.

As a consequence of the apartheid legacy, direct black equity control over the JSE's average market capitalisation of R11.9 trillion as at 30 June 2014 (for Listed Companies), stands at 3% (R358 billion) for shares directly held by black South Africans. To reach 25% of black control it requires an additional 22% worth R2.6 trillion at current estimated market capitalisation of the JSE. This is a gap that still needs to be addressed and funded in order to achieve transformation of up to 25% of JSE market capitalisation.

To arrive at the rationalisation of the 3% of the JSE shares that is currently controlled by black people, the NEF applied the principle of "Direct ownership", which is defined in the Codes of Good Practice as equity held directly by empowerment companies or individuals, broad-based groups or community trusts, or by an employee share ownership scheme to arrive at 3% of JSE market capitalisation that is under black control. The other measure of BEE transformation uses the "indirect ownership" or "Mandated Investments" principle as defined in the Codes of Good Practice, where the beneficiaries of the equity do not play any part in the voting rights attached to the equity and where the shares are managed by third parties such as asset managers or the banks on behalf of pension funds, insurance policy holders or unit trusts. 

The NEF agrees with Who Owns Whom's methodology of examining the shareholding and shareholding spread as well as the board of directors for each company to establish which shareholder or group of shareholders acting in consort have voting control and therefore control the management of the company and consequently its cash flow. Once the controlling shareholding is established and categorised, the total market for that company is assigned to that category for a comparative analysis across all companies listed on the JSE. 

Using a detailed spreadsheet with individual companies that are listed on the JSE, the NEF looked at the nature and profile of each shareholder to determine the shares that are controlled by Black People through direct shareholding rather indirect shareholding.

As an example, the total JSE market capitalisation as at 08 November 2014 was R10 trillion and the value of equity/shares under black control was approximately R300 billion. Who Owns Whom examined companies that are listed on the JSE and their respective market cap, which total R10 trillion, and further unpacked BEE shares that are controlled by black people. The NEF then took the shares that are in black hands, valued at approximately R300 billion, divided this by R10 trillion, to get to the said 3% that is in black hands as a measure of direct shareholding. 

The JSE methodology establishes ownership only and will be higher as it includes mandated investments such as institutional pension fund managers and private equity funds and savings funds. This capital that is attributed to BEE investment institutions also belongs to white shareholders and is not owned solely by black shareholders. These institutions invest the cash they have on behalf of the shareholders who are non-black, and they are not necessarily the owners of the capital. This is not a true indication of the level of transformation in the country. 

Furthermore the calculations made in both the Who Owns Whom or JSE Methodology do not measure the extent that debt is used to acquire these shares by the black shareholders. If the levels of indebtedness or encumbrance of the shares were taken into account, the value of black shareholding would be considerably less than the estimated amount of 3% black ownership.

Also, some of the entities have applied the "modified flow through principle" in calculating their ownership. This principle allows an entity in a group to regard some of the entities in the chain which have white ownership as being 100% Black-owned. This is a mechanism that helps the funding of BEE transactions through having equity partners rather than using pure debt which increases the risks in a transaction, especially in economically turbulent times. It is prudent to do this when one is measuring the BEE level of an entity in terms of the scorecard, but it still does not fully deal with the economic benefit that would ultimately accrue to Black People when they sell their shares. 

Therefore, the point is raised about ownership of equity on the JSE in absolute terms and not calculated based on the BEE scorecard which includes other elements on which an entity can score empowerment points. 

This is one of the issues that the Government seeks to address with the new Codes of Good Practice on B-BBEE where an entity that does not meet a subminimum on ownership will be penalised in deciding its eventual level in terms of the scorecard. Ownership is one of the key elements of B-BBEE and it is essential that the ownership landscape of entities operating in South Africa reflects that the majority of people living in the country are Black People. 

This is key in order to confront our past as a country and redress the imbalances caused by the legacy of apartheid.

Statement issued by Mac Maharaj, The Presidency, and Sidwell Medupi, Spokerson for the Minister of Trade and Industry, March 1 2015

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